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Wednesday, June 15, 2016

Gains Fade Following Fed

Charles Schwab: On the Market

Posted: 6/15/2016 4:15 PM ET

Gains Fade Following Fed

U.S. stocks lost gains in the final hour of trading and closed lower
on the heels of the conclusion of the Federal Reserve's two-day monetary
policy meeting, where the Central Bank left rates unchanged and issued
updated economic projections. Treasuries and gold were higher and the
U.S. dollar and crude oil prices were lower. In domestic economic news,
producer price inflation was hotter than expected, industrial production
declined and manufacturing output from the New York region unexpectedly
moved into expansion territory.

The Dow Jones Industrial Average (DJIA) lost 35 points (0.2%) to 17,640,
the S&P 500 Index declined 4 points (0.2%) to 2,072, and the Nasdaq
Composite finished 9 points (0.2%) lower at 4,835. In moderately-higher
volume, 886 million shares were traded on the NYSE and 1.8 billion
shares changed hands on the Nasdaq. WTI crude oil decreased $0.48 to
$48.01 per barrel and wholesale gasoline declined $0.02 to $1.50 per
gallon, while the Bloomberg gold spot price increased $8.02 to $1,293.73
per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar
to six major world currencies—was 0.3% lower at 94.66.

Whole Foods Market Inc.
(WFM $31) saw some pressure, possibly due to the Food and Drug
Administration (FDA) citing the company for several food safety
violations at its manufacturing facility in Massachusetts in a June 8
letter that was revealed yesterday. Also, today WFM was downgraded to
sell from neutral by Northcoast Research.

The Producer Price Index (PPI) (chart)
showed prices at the wholesale level in May rose 0.4% month-over-month
(m/m), versus the Bloomberg expectation of a 0.3% increase, and compared
to April's unrevised 0.2% gain. The core rate, which excludes
food and energy, grew 0.3% m/m, above forecasts of a 0.1% rise, and
April's unadjusted 0.1% increase. Y/Y, the headline rate dipped 0.1%,
matching projections, and the core PPI was up 1.2% last month, topping
estimates of a 1.0% gain. In April, producer prices were flat and up
0.9% y/y for the headline and core rates, respectively.

Industrial production (chart)
declined 0.4% m/m in May—the third decline in the past four
months—versus estimates of a 0.2% decrease, and following April's
downwardly revised 0.6% increase. Manufacturing production declined 0.4%
and utilities output dropped 1.0%, while mining production ticked 0.2%
higher. Capacity utilization declined to 74.9% from April's
downwardly revised 75.3%, and compared to projections for a 75.2% rate.
Capacity utilization is 5.1 percentage points below its long-run
average.

The Empire Manufacturing Index showed output from the New York
region unexpectedly moved into expansion territory (a reading above
zero) for June. The index jumped to 6.0 from May's unrevised -9.0 level,
with forecasts calling for a rise to -4.9.

The MBA Mortgage Application Index declined 2.4% last week, after jumping 9.3% in the previous week. The decrease came as a 0.7% decline for the Refinance Index was met with a 4.9% drop for the Purchase Index. The average 30-year mortgage rate fell 4 basis points (bps) to 3.79%.

At 2:00 p.m. ET, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting,
where the Fed kept its policy stance unchanged at a targeted range of
0.25%-0.50% for the Fed funds rate. The Committee recognized that since
its last meeting in April, the pace of improvement in the labor market
has slowed, while growth in economic activity appears to have picked up.
It was also noted that "the committee expects that economic conditions
will evolve in a manner that will warrant only gradual increases in the
federal funds rate; the federal funds rate is likely to remain, for some
time, below levels that are expected to prevail in the longer run." The
Committee also released updated economic projections, slightly
increasing their current year forecasts for inflation and mildly
decreasing estimates for output for this year, while it held current
year projections for the federal funds rate, but decreased estimates for
the rate in 2017 and 2018. In her scheduled press conference after the
statement, Chairwoman Janet Yellen reiterated the need to maintain the
Fed's current policy, and also noted in the ensuing Q&A session that
it was fair to say Brexit concern was one factor in the decision.

Treasuries finished higher following the Fed statement, with the yield
on the 2-year note declining 5 basis points (bps) to 0.67%, the yield on
the 10-year note decreasing 3 bps to 1.58% and the 30-year bond rate
dipping 1 bp to 2.42%. Bond yields have been mostly retreating as of
late on rising growth concerns, growing uncertainty regarding a U.K.
exit from the European Union (EU), known as a Brexit, and as the markets
grapple with pushed out Fed rate hike expectations.

Tomorrow, the U.S. economic calendar will include the Consumer Price Index (CPI), forecasted to have increased 0.3% m/m during May, while excluding food and energy, the core rate is expected to have risen 0.2% m/m. We'll also receive the Philly Fed Manufacturing Index,
forecasted to move back into expansion territory to 1 for June from
-1.8 in May, where a level of zero represents the demarcation point
between expansion and contraction in manufacturing activity. Finally, we
will receive weekly initial jobless claims, forecasted to have increased to 270,000 from the prior week's 264,000 level.

European equities traded higher, with the Stoxx Europe 600 Index
rebounding from its worst five-day plunge since February, per Bloomberg,
as mining stocks led a broad-based advance. The rebound comes despite
today's monetary policy decision in the U.S. and as uncertainty remains
regarding the possibility of a U.K. Brexit. The U.K. will hold a
referendum on June 23 to determine if it will leave the EU and for
analysis on the issue read our article, Brexit: Will the UK Leave the EU? at www.schwab.com/insights. Also, Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, CFA, discusses, Brexit: 5 Things Investors Need to Know, at www.schwab.com/oninternational. Be sure to follow Jeff on Twitter: @jeffreykleintop.

The global markets appeared to catch their breath after the recent
stock selloff and ensuing drop in global bond yields that preceded
monetary policy meetings—including tomorrow's decisions out of the U.K.
and Japan—and amid Brexit concerns and festering global growth worries.
Schwab's Jeffrey Kleintop offers Five ways investors can make the most of slower growth at www.schwab.com/oninternational.
The euro and British pound gained ground on the U.S. dollar, while bond
yields in the region were mostly lower. In economic news, the U.K.
unemployment rate dipped unexpectedly to 5.0% for April, while the
eurozone trade surplus surprisingly widened in April.

Stocks in Asia finished mostly higher, despite likely caution ahead of
today's monetary policy decision in the U.S., which will be followed by
tomorrow's decisions out of Japan and the U.K. Stocks rebounded somewhat
from a recent selloff in the global equity markets, courtesy of
heightened growth concerns and festering uncertainty of a U.K. Brexit.
Japanese equities advanced, with the yen retreating modestly from its
recent rally that was spurred by elevated risk aversion as of late,
ahead of the Bank of Japan's (BoJ) monetary policy decision. For
analysis ahead of the BoJ's monetary policy decision, see Schwab's
Jeffrey Kleintop's latest article, What investors need to know about helicopter money, at www.schwab.com/marketinsight.

Mainland Chinese listings rose, showing some resiliency in the face of
the decision by MSCI Inc. to delay the inclusion of mainland stocks into
its global benchmark indexes. Bloomberg noted that the decision may
have sparked speculation that state-backed funds likely stepped in to
support the markets. Securities trading in Hong Kong also advanced,
while after the closing bell, China reported stronger-than-expected new
yuan loans but an unexpected deceleration in aggregate financing—a gauge
of total credit issued. Indian stocks gained ground with the reprieve
from the global selloff helping the index snap a four-session losing
streak. However, stocks in South Korea and Australia declined, with
weakness in financials and basic materials issues weighing on the
market.

In addition to the aforementioned decisions from the Bank of Japan and
the Bank of England, tomorrow's international docket will yield the
release of retail sales from the U.K. and CPI for the Eurozone.

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